medium · CFA Level I equity
Nadir Components' cost of equity is 12%. The firm is in a transition stage where its ROE is falling from 25% to 15%.
If its retention ratio is 0.40, what happens to its sustainable growth rate (g)?
- It stays at 10% because the cost of equity is the primary driver of growth.
- It increases because the firm becomes more efficient as ROE approaches r_e.
- It falls from 10% to 6%.
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